In an interview with Anjali Raulgaonkar from Capital Market Publishers, Puneet Pal, Head Fixed Income, BNP Paribas Mutual Fundsaid, The key driving factor for yields would be lower Inflation and the favorable demand supply dynamics post demonetization as demand for gilts will increase structurally over the medium term due to increase in Bank deposits.
Mr. Puneet Pal
1.What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why? What will the key driving factors for yields?
Yields in India have come down by 50-60 basis points across the curve over the last one month. Since the beginning of this year yields have come down by 150 basis points. We expect the 10-year bond yield to come down further to 6.00% by March 2017, the fall in yields is reflecting the fall in Inflation and we expect Inflation to undershoot RBI's March 2017 target of 5.00%.
The demonization of high denomination currency announced by the Government will lead to further fall in Inflation and the recent drop in yields is reflecting those expectations. We expect 50 bps rate cut by March 2017. The key driving factor for yields would be lower Inflation and the favorable demand supply dynamics post demonetization as demand for gilts will increase structurally over the medium term due to increase in Bank deposits. We expect a net addition of INR 2-3 trn in bank deposits over the medium term because of demonetization.
2. How do you perceive the government's demonetization move? What are negative and positive implications?
Demonetization is a bold move by the government. We believe that along with Demonetization other follow through measures will be needed and more administrative steps will be required to reinforce the strong message which demonetization has delivered.
Demonetization, if followed through by other administrative steps, will lead to a wider Tax base in the economy and will structurally improve the Tax / GDP ratio in the economy. Apart from that it will also lead to increase in share of financial savings over a period and will be beneficial for the Financial Services Industry the Asset Management Industry. There will be major positives over the medium term though short term adjustment can be stressful.
3.What is your strategy for short term funds? What is your exposure to long term funds and why?
In our short term, Income Funds, we are keeping the portfolio average maturity close to 3yrs as we believe that from a risk adjusted basis the 3yr point on the curve looks better. Our portfolio has a combination of money market instruments and short term debt instruments and we manage the portfolio in a conservative manner. Our investment philosophy is all about delivering a superior risk adjusted return. We are conservative in taking credits in our portfolio's and only invest in securities whose rating is AA- and above.
4.Kindly share your views on recent inflation movement? Where will the inflation curve move in near term? Why?
The CPI Inflation for October came in at 4.20%, going ahead we expect Inflation to remain low as normal monsoons have lowered food prices and the immediate impact of demonetization will be lower Inflation and growth, which can continue for the next 2-3 quarters. We expect inflation to undershoot RBI's target of 5% by March 2017. Over the next one year we expect Inflation to remain below 5% and average around 4.5% over the course of the next one year, primarily because lower food prices and demonetization.
5.What's your investment strategy?
Our Investment Philosophy is to deliver superior risk adjusted returns to the Investor. This is the guiding principal across our portfolio's. The strategy for individual portfolio's will depend upon the positioning of respective funds. In some of our funds we may take tactical calls and in other funds we may take a more longer term view.
Our Investment strategy for individual funds starts from the asset allocation decision depending upon the product's positioning along with the regulatory requirements concerning the fund. Our outlook on Interest rates will determine the kind of duration that we will run in our portfolio's and the relative valuation of the different maturity buckets will determine the position on the yield curve. Likewise, the outlook on the credit scenario will determine our exposure to various sectors. Our overall credit policy is conservative and we do not take exposure to securities whose rating is below AA-.
6.How often do you re-balance your debt allocation?
In the normal course, we review our portfoliosmonthly though we may or may not rebalance the portfolio at the time of review. The need to rebalance our portfolio's will arise when there is a change in our outlook and that will depend upon the evolving market scenario. We keep a regular tab on both domestic and global macroeconomic variables and how they are likely to impact the markets.
7.If the interest rates fall further what will be your strategy for debt funds?
We do expect policy rate to fall by another 50-bps going factor and as such as per the given positioning of various individual funds, we are maintaining a long duration bias in our funds.
8.What is your advice to the investors?
Currently from a risk reward perspective we would advise Investors to invest in Short term Income Funds considering the fact that Interest rates and yields have fallen by 175 basis points over the last two years and though we expect further reduction in policy rates to the tune of 50-70 bps points , we advise the investors to be overweight on the short term income funds considering that fact that they will be investing for a period of 3yrs. Those investors with a shorter term and tactical view can invest in gilt funds or dynamic bond funds.
9. Has the inflation started to fall again? What will be the RBI's move in coming policy amidst global and domestic events?
Yes, Inflation has fallen on back of lower food prices and we expect Inflation trajectory to be lower at around 4.5% over the next one year. We expect RBI to cut rates by 50 basis points over the next three months.